2.

4 FINANCIAL RATIOS ANALYSIS

Liquidity Ratios

If there are other Current Asset items other than Cash, Marketable Securities and Accounts Receivable,
current ratio is automatically higher than quick ratio.

Other Current Asset accounts are not considered liquid.

Liquidity ratios:
    
•Current ratio= 32,500/ 17,300= 1.88
• Quick ratio= (4,250+9,500)/ 17,300= 0.79
•Cash ratio= 4,250/ 17,300= 0.25
•Net working capital= 32,500 –17,300= P15,200

Activity Ratios

When the question is silent, sales are assumed as credit sales.

Activity ratios

•AR turnover= 78,600/[(8,000+9,500)/2]= 8.98x

•Days sales outstanding= 360/8.9829 = 40.08 days
•Inventory turnover= 46,900/[(16,000+13,750)/2]= 3.15x
•Days inventory outstanding= 360/3.1529 = 114.18 days
•Fixed asset turnover= 78,600/[(42,000+44,700)/2]= 1.81x
•Total asset turnover= 78,600/[(80,000+82,500)/2]= 0.97x
•AP turnover= (13,750 + 46,900 – 16,000)/[(12,000+10,000)/2]= 4.06x
Days payable outstanding= 360/ 4.0591 = 88.69 days    

Debt Ratios
Debt ratios
•Debt ratio= 39,300/82,500=  0.48 or 47.64%
•Debt-to-equity ratio= 39,300/43,200= 0.91 or 90.97%
•Debt to capital= (2,500 + 22,000)/ (2,500 + 22,000 + 43,200)=0.36 or 36.19%
•Times-interest-earned= 20,950/4,950=  4.23x
•EBITDA coverage= (20,950 + 2,500 +800)/ (4,950 + 800 + (1,750/70%))= 2.94x
•Fixed payment= (20,950 + 800)/ (4,950 + 800 + (1,750/70%)) = 2.64x
Equity multiplier= 82,500/ 43,200 = 1.91x    

Converting debt ratio to debt-to-equity

30% debt ratio; 30%/70%= 42.86%

 30% debt-to-equity= .3/1.3=23.08%

Profitability Ratios
In other cases, Dividend Payout Ratio = Total Dividends / Total Earnings Available to Shareholders

Profitability ratios
•Gross Profit margin= 31,700/ 78,600= 40.33%
•Operating profit margin= 20,950/ 78,600= 26.65%
•Net profit margin= 11,200/78,600 = 14.25%
•ROA= 11,200/ ((80,000+82,500)/2)= 13.78%
•ROE= 11,200/ ((40,000+43,200)/2)= 26.92%
•BVPS= 43,200/10,000= P4.32/ share
•EPS= 11,200/ 10,000 = P1.12/ share
•Dividend payout= 0.84/1.12 = 75%
•ROIC= (20,950 x 70%)/ (24,250 + 41,600) = 22.27%
•Basic earning power= 20,950/ ((80,000+82,500)/2)= 25.78%

Market Ratios

*use given market price, not average market price.

Market ratios:
•P/E ratio= 16/1.12 = 14.29
•M/B ratio= 16/4.32= 3.70
•Dividend yield= 0.84/16 = 0.0525

*preferred stock is deducted from profit margin/net income

(for DuPont, use Total Assets for turnover not average, but for consistency, use average in our case.)
 Dupont Illustrative:
     TA turnover = 324,000/216,000 = 1.5
     ROA= 5.4% x 1.5  = 8.1%
     ROE= 8.1% x 1.5 = 12.15%
     Equity multiplier= 1.5/1 = 1.5

Dupont Systems of Analysis

ROE risks not considered: the more debt you add, the more risk of bankruptcy or insolvency.

Benchmark >>>>> industry average (eg. cpa passers national vs competitors)

Income statement values are affected by inflation.

Window dressing -
Knowledge Check (Theory)

1. False
2. False, per Sales
3. True
4. False, Other things held constant, the lower, the total debt to total capital ratio, the
lower the interest rate the bank would charge.

True because lower coverage, lower interest rate, lower charge

5. False, dapat low p/e ratio risky

6. True
7. False
8. False, OVERTIME = combined analysis, at one point in time = benchmarking
9. True
10. False

Knowledge Check (Multiple Choice)

11. D
12. B
13. D
14. B
15. D
16. C
17. D
18. B
19. B
20. C
Q#1 Problems solution:
21. (9,064,000-7,870,000)/ 7,870,000 = 15.17%
22. 600,000 x  (100% + 40-44%) = 840,000; 846,000; 852,000; 858,000; 864,000
23. 7M – 5.6M + 125,000 = P1,525,000
24. 1,608,000 - (1,525,000 + (-206,000 - 310,000))= 599,000
2018 OCF= 1,146,000 + 250,000 + 212,000 = 1,608,000
25. 2,400,000 + 750,000-800,000  -3,000,000 = 150,000; 160,000; 170,000; 180,000; 190,000; 200,000
26. 599,000 - [(280,000-330,000 x 70% ) + (200,000 - 600,000)]= P803,000; P796,000; P789,000;
P782,000; P775,000; P768,000 OR P789,000 (regardless of given)
27. (1,580,000-1,595,000/947,000)^(1/10) - 1 = 5.25-5.35%
alternate answer considered: 32.5%-32.63%
28. 808,000/ 2,850,000 = 28.35%
29. 366,100/ 2,850,000 = 12.85%
30. [808,000 x (1-30%)] + 192,000 = 757,600
31. 72/ (9-12) = 8, 7.2, 6.55, 6 years
[ln(40/20) / ln(1+ (9-12%/12))] /12 = 7.73; 6.96;  6.33; 5.81 years
32. 502,367.2954-802,367.2954 * (1.00625)60 =  730,087.58 ; 875,417.02;  1,020,746.46 ; 1,166,075.90
Balance to be paid in lumpsum: 1,750,000-2,050,000  - 1,247,632.7046 = 502,367.2954-802,367.2954
 PV of montlhy loan payments: P25,000 x [(1-1/(1.00625)^60)/0.625%] = 1,247,632.70455041
33. (420,000-520,000 – 380,000)/ 380,000 = 10.53% - 36.84%
2015 net income: 19% x (2,360,000/1.18) = 380,000
34. 156,500 + (20,000-25,000 x 70%) – 117,000 = 53,500-57,000
if you consider change in cash balance= 44,000-47,500
35. 156,500 – (117,000 - 15,000) = 54,500; alternate if you consider change in cash = 45,000

CFA formula, kapag SCF, iniignore na cash balance pero sa SFP sinasama cash.

Knowledge check answers:

1-5.) F, F, T, T, F
6-10.) T, F, F, T, F

11-15.) D, B, D, B, D
16-20.) C, D, A, B, C

Key takeaways from today's discussion:

1. Industry averages can be misleading and unreliable, as they represent the
performance of an entire industry wherein there can be variations (especially with
regard to factors such as business size) and outliers (in terms of performance). Hence,
for more insight, it is recommended that companies don't draw conclusions based on
these results and, instead, benchmark themselves with a key competitor or player from
the same industry. 
 
2. When measuring a company's performance, one should not solely rely on financial
ratios as these have their limitations that could distort these values, which in turn can
affect interpretation. Other internal and external factors should be considered such as
the business climate during a specific period.

21. 1.17
22. 0.07
23. 200,000
24. 1.044
25. 157.50
26. 12.6
Knowledge Check Problems:
    
21.)(30,0 00 + 40,500)/60,200 = 1.17
 Current liabilities: (30K + 40.5K + 80K)/2.5= 60,200

22.) (207,000-130,000)/1,100,000 = 7%

23.) (2M x 80%)/8 = 200,000

turnover= 360/45 = 8.0

24.) 104,400/100,000 = 1.044

earnings to CS= (202,000 x 70%) - 37,000 = 104,400

25.) 35 x 4.5 = 157.50

26.) 157.50 / 12.5 = 12.60
27.) (3.2-1)/3.2 = 68.75%

28.) 630,000/ 5,600,000 = 11.25%

Net income 12.60 x 50,000 = 630,000
Total asset: (35 x 50,000) x 3.2 = 5.6M

 29.) 0.18 x 5.6M = 1,008,000

30.) 720,000-33,000) x 35% = 240,450

 

Total Capital includes debt.

In finance, consider both bondholders and stockholders as investors of the company that bring capital. Hindi
capital ang free liabilities, part of operations lang.

Debt refers to long-term liabilities (interest-bearing).

sa formula ng EPS and BVPS, same lang ba ang preferred stock / preferred stock dividends? NO. Kasi sa EPS,
the numerator you pay dividends PS. Sa BVPS, preferred stocks ay book value ng preferred stocks mismo.

concept ng equity multiplier na we assume SHE at 1?

3.2 = total assets, 1.0 = she, 2.2 = total liab
debt ratio= 2.2/3.2 = 68.75%

Quiz Explanation:

expected lower debt, more net profit margin

expect ROA to decrease becasue of lower Net Income. but ROE, it determines (depends on multiplier effect)